Becoming an entrepreneur means you've decided to sign yourself up to learn things the hard way.
This is what makes building a company so exciting. It's also the reason building a company is so stressful. Setting out and doing something on your own is both liberating and daunting--and for many entrepreneurs, this means learning important lessons the hard way.
As someone who has been building businesses for over 40 years, I'd like to share five of the big mistakes I see new entrepreneurs make over and over again. My hope is that, after reading this, you'll avoid some of the pitfalls on the journey that can lead to expensive lessons.
1. Don't invest in real estate when you could invest in inventory, assets, and startup capital.
You would be surprised how many entrepreneurs think it's a good idea to buy the brick-and-mortar space they want to use for their business, when they could just as easily rent.
The logic here is, "Hey, if I'm going to be using this space, why not own it and build my real estate portfolio over time?" Trust me, this isn't the time or place to start building your real estate portfolio. Right now, you need to build a profitable business--and you need to do it before you run out of cash.
It's far more valuable to invest your valuable capital into things that can grow your business: inventory, payroll, account receivables, etc.
2. Don't skimp on legal documentation.
Anyone can start an LLC. Do you have an operating agreement? Do you have protection for any inventions, patents, trademarks, or other intellectual property? Do you have stock agreements for any partners or investors? Do you have appropriate employee documentation?
It's fun to come up with the big, grand vision and daydream about how you're going to spend all the money you'll make. By all means, let your mind wander. But always, always make sure you have your ducks in a row. Nothing kills a business faster than people leaving things to "trust" instead of setting appropriate expectations in writing.
If you need help, there's a free service called ScaleUpCheckUp.com designed to give entrepreneurs tools to make sure they have the right documents in place to start a business.
3. Don't pay yourself more than you have to.
Choosing short-term rewards over long-term home runs happens all the time. You stumble upon a business idea. You grow the team to a few employees. And then you immediately start paying yourself a higher salary.
You're depriving your company of the resources it needs to grow. Instead of hiring for a role that could help the business grow even further, you decides you need a new watch, faster car, or fancier home. Sure enough, the company stagnates, and then usually either dies or gets acquired by a larger company--whose founder is more concerned with long-term growth.
As someone who has acquired companies far larger than my own, simply because the founders had taken all their growth capital for themselves, let me tell you: This mistake happens far more often than you might think.
4. Be careful when hiring friends and family members.
I write on this at length in my book, All In, because I've found hiring friends and family to be the easy way out. It allows you to get someone into a role quickly. It removes the painful recruiting process. You probably consider friends and family trustworthy.
Before you bring someone from your personal life into your professional life, ask yourself this one question: Will you be able to fire them? And what would that do to your relationship?
The answer to this question is never positive. I've had exceptions in my life, but it usually ends up being a band-aid solution to a longer-term problem.
5. Do your due diligence on your technology--or face the consequences.
The wrong technology provider can crush a business. When I started my most recent company, LendingOne, I never felt the available loan origination systems were even close to providing what we needed for the service we wanted to provide. Instead of trying to fit a round peg inside a square hole, we hired and designed our own--and now have some of the best technology in the industry (and it's all proprietary).
Not every company needs to build its own software. What's more important is that you understand the functions you need within your business, and you do your due diligence to find the right technologies for your product or service.
If you find out you've chosen the wrong technology, take the time to understand why. Slapping another tech platform onto the problem is rarely the solution.